Will Electronic Arts’ Stock Rise Following Its Q3 Results?

Electronic Arts (NASDAQ: EA) is scheduled to report its fiscal FYQ3 2022 results on Tuesday, Feb 1. We expect the company to likely post revenue and earnings in-line with the consensus estimates, primarily led by a robust demand outlook for its FIFA franchise, along with the contribution from its recent acquisitions of Glu Mobile, among others.

The company may see strong user engagement levels, given the spread of Omicron, implying that people spent more time at home, eschewing more public forms of entertainment. However, this trend may reverse in Q4, given that Omicron appears to be milder than earlier variants of Covid-19.

Furthermore, our forecast indicates that Electronic Arts’ valuation is $177 per share, which is 36% above the current market price of around $130, implying EA stock is undervalued currently, in our view. Our interactive dashboard analysis on Electronic Arts Earnings Preview has additional details.

(1) Revenues expected to be in-line with the consensus estimates

• Trefis estimates Electronic Arts’ fiscal Q3 2022 revenues to be around $2.7 billion, in-line with the consensus estimate.
• The company should benefit from its live services offering, primarily for FIFA and Apex Legends franchises.
• Electronic Arts made multiple acquisitions over the last few quarters, including that of Playdemic and Glu, which will bolster the overall top-line growth.
• Looking back at Q2, the company reported revenue of $1.85 billion, reflecting a large 59% y-o-y growth, driven by high demand for its sports titles and Apex Legends.
• Our dashboard on Electronic Arts Revenues offers more details on the company’s segments.

(2) EPS also likely to be largely in-line with the consensus estimates

• Electronic Arts’ fiscal Q3 2022 adjusted earnings per share (EPS) is expected to be $3.25 per Trefis analysis, just two cents above the consensus estimate of $3.23.
• The company’s adjusted net income of $453 million in fiscal Q2 2022 reflected a large 2x growth sequentially.
• The company managed to improve its gross margins on the back of strong digital mix in its sales, while its operating expenses were also lower than anticipated. For perspective, digital accounted for 62% of full games sold for the trailing twelve month period, up six percentage points y-o-y. The margin expansion likely continued in Q3 as well.
• Furthermore, for fiscal 2022, we expect the adjusted EPS to be higher at $6.96 compared to $5.75 in fiscal 2021.

(3) Stock price estimate above the current market price

• We estimate Electronic Arts’ Valuation to be around $177 per share, which is 36% above its current market price of $130.
• This represents a P/EBITDA multiple of 102x for the company based on Electronic Arts EBITDA for the last twelve months. Note that EA has enjoyed high P/EBITDA multiple historically, with an average of 98x over the last five years, in line with average of 98x P/EBITDA for its peer Take Two Interactive.
• That said, if the company reports upbeat results, with sales growth as well as Q4 guidance better than the street estimates, it is likely that the P/EBITDA multiple will be revised upward, resulting in even higher levels for EA stock.